No matter what type of investment you make, it is important that you know how to legally apply for tax breaks to keep more money in the bank. You may be an investor for some time and know what options are available. However, if you’re new to investing, it’s worth learning about tax breaks that you can apply to different investments.
A 1031 exchange is one way to defer taxes possibly. This allows investors to defer capital gains by exchanging one investment property for another. Although 1031 exchanges were initially created to facilitate real estate investments, many investors are still unsure if they can be used for stocks or other investments.
What is a 1031 Exchange?
Real estate investors can use a 1031 exchange to defer capital gains tax on the sale of their investment property. An investor can use a 1031 Exchange to exchange their investment property for another property of “like-kind.” Investors can not just use these properties at their discretion to avoid taxation.
Real estate investors can use a 1031 Exchange (provided both properties meet IRS regulations) to defer capital gains tax and other taxable income. They trade their ownership in one property for another.
Stocks can be traded on a 1031 exchange.
The short answer is no. The IRS has designated 1031 exchanges as being used specifically for real estate investments. The Revenue Act of 1921, which governs the 1031 exchanges, was passed in 1921. The Tax Cuts and Job Act 2017 has recently been amended. This law states that only certain investments are eligible to be used in a 1031 exchange. They must meet the IRS definition of “real estate.”
The IRS does not consider stocks, bonds, or other assets to be real property. The IRS does not consider stocks, bonds, or other types of assets to be real property.
Are there Alternatives?
Even if you cannot use a 1031 exchange, don’t lose hope that you will get a tax break for your stock investments. Alternatives like the 721 UPREIT may be available that will allow you to pay a lower tax. Talk to your tax advisor about whether this is an option for you.
Although you cannot use a 1031 exchange for stock profits, other options can help you reduce your taxes. It would help if you talked with a licensed accountant about the details of your investments and how they relate to federal and state tax laws.